Does it make sense to pay off our mortgage with retirement savings? Right now we are living paycheck to paycheck.

[SweetieJean]

Are you less than age 59.5?

You may wish to see a local financial planner, since this is not solely an income tax question. For example, be aware that qualified retirement plans (401(k), 403(b), IRA, etc.) are protected in bankruptcy, while homes generally are not. There may be State tax issues as well.

Given the proposed tax law changes for 2018 forward, I would tread carefully at this point.

[SweetieJean]

You might also look into other options, such as refinancing, taking a second job, etc.

[edmck123]

Not yet 59.5, only 48.  I recently quit my job so that I would have more time with my 4 kids. They need me now and we have a lot of unexpected expenses because we have 4 kids.  Hopefully, they will not need me when I am 59.5 years.  It would be nice to have a little more income to not feel so stressed each month trying to pay the bills.  If we paid off our house, this would free up more income and also we would not have to pay the 20K in interest we still have left.

[SweetieJean]

See Opus's answer below. Are you prepared to pay as much as 45% to the IRS to do this?

[edmck123]

Could be that or paying high interest on credit cards if there is not enough money to pay all of bills that come our way.  Maybe I could do it over a couple of years so that our taxable income is not that high.

[SweetieJean]

At a minimum, roll over the plan to an IRA, and then take it out only when you need it.

[edmck123]

Thanks so much.  It would be nice just to be done with our mortgage and I believe we have enough in there so that there would be plenty left for retirement.  It is so sad that there are such steep fines to make your financial situation better.

[fanfare]

Never invade your retirement funds, for any reason.
There's still time to refinance for less than 4 percent before the fed rate hikes kick in in earnest.

[Opus 17]

That's not a tax question, really, so you might want to ask a retirement planner.

If you are still working and under age 59-1/2 then it will almost always be far far better to leave the retirement account alone to grow for your future.  The tax penalties on early withdrawal are quite burdensome.  Even if it means finding an extra source of income.  Or, if you stop making new payments into the retirement accounts so you have more spending money, still leave the existing balance alone to grow.

From an economic point of view, you first want to think about your interest rate (including any discount if you itemize your deductions and deduct the interest) against the earnings from your investments.  If you are very conservatively invested (3-4% return) with a high mortgage (>5%) then paying off the mortgage may save you some money in the long run.  If you are making 10% returns and paying 4% (discounted to 3% by itemizing) then you make more more in earnings than you pay in interest.

Then you also need to think about the income tax on the retirement account.  Even if you decide to pay off the mortgage, you might want to do it over a few years as a large lump sum withdrawal could put you in a higher tax bracket and affect your eligiblity for other tax credits and deductions that have phase-outs.

If you are under age 59-1/2 then you will pay an additional 10% penalty on the withdrawals, so your tax owed could be up to 45% on the withdrawal amount.

[SweetieJean]

That's a very expensive way to pay off  a mortgage.